Addressing Short-Term Challenges Amidst Global Uncertainties
    Category: Column By : Haryanto T. Budiman Read : 1166 Date : Tuesday, August 11, 2015 - 22:09:04

    One year ago, the arrival of the new administration was greeted with enthusiasm, with the government’s bold decision to eliminate fuel subsidies lauded by the market. Fast forward 12 months, and with the economic situation now very different to the one that was inherited, the honeymoon period is over. While the long-term outlook remains robust, the country is facing short-term challenges that are affecting growth, which slowed to 4.7% in the first quarter of 2015. Issues include the government’s own spending, which is critical to spurring growth, stalled private sector investment due to licensing challenges, as well as addressing the drop in consumer spending and weak exports.

    Other causes for concern in the economy include the depreciation of the Indonesian rupiah against the U.S. dollar and weaker investor sentiment, which is in part caused by inflationary pressures and the specter of a widening budget deficit as government revenue declines. Added to these domestic pressures are also external factors that will impact Indonesia. Volatility in the global markets caused by the expectation of a rising U.S. interest rate environment, uncertainty in Europe and a slowdown in China, are all challenges that are difficult to guard against.

    Despite these uncertainties the country still needs to address the short-term challenges. First of all, the market needs to see real progress on the disbursement of quality government spending, which has fallen significantly behind plan. Addressing this will require a systematic approach whereby high profile, high impact and quality projects must be identified, prioritized and tightly monitored by a central body to resolve issues in a timely manner with full accountability across the owners of those projects. Trust and confidence in the management of these projects and of the government’s spending will only be won by having transparency on progress that is shared regularly.

    In parallel, there should be a stated vision with specific milestones and deliverables for government spending.  Any new government programs, including social programs, must be consistent with this vision. While Indonesia harbors abundant opportunity, we cannot be complacent. As other countries in ASEAN act to attract investors, this country could lose out if nothing is done. Indonesia must strive to create a welcoming environment by marketing investment opportunities, removing obstacles to doing business efficiently, further streamlining the licensing process and developing investor-friendly regulations and legislation.

    Whilst focus should be on Foreign Direct Investment (FDI), at least in the short to medium term, the government must also be able to attract portfolio investors. Strong portfolio inflows in this environment can lower bond yields and strengthen the currency. Strong inflows could also result in improving market sentiment to further attract FDI.

    Peter Senge, a systems dynamics expert at MIT, once said that today’s problems come from yesterday’s solutions, and therefore, we should avoid sowing the seeds of tomorrow’s problems with today’s solutions. This is something worth keeping in mind when tackling Indonesia’s short-term challenges and will ensure the country makes the most of the opportunity that exists for the future.